It looks like the sweetest imaginable pension deal that Dallas. Tex. police and firefighters have long enjoyed is coming to an abrupt end.
A program called the Deferred Retirement Option Program (DROP), launched in 1993, allows Dallas cops and firefighters to ‘retire’ after 20 years, when fully vested in their pension fund, but to keep working. Their pension payments go into DROP instead of their bank accounts, Until now, DROP members were guaranteed an annual return of between 8 and 10 percent, even in years when the system itself earned far lower returns. What’s more, DROP members pay a fee totaling just 4 percent of their paychecks, while non-“retired” workers contribute 8.5 percent to their pensions.
Last week, the Dallas Police and Fire Pension Fund board signaled that something has to change, and soon. Without a radical overhaul, the fund will be insolvent in less than 30 years. According to The Dallas Morning News:
That plan, if approved, will probably force cops and firefighters to either retire sooner or stay in the normal fund longer. Once in DROP, members could earn a 3 percent interest rate for seven years. Then, the money will earn nothing until they retire.
DROP has been such a great deal for Dallas cops and firefighters that it has created 283 millionaire retires, the News reported last year:
Pension officials say one person’s DROP account had more than $3 million in it. An additional 13 have more than $2 million. And 283 have more than $1 million.
Some officials and retirees say that reforming DROP may be too little and too late to save the fund. Last year, DROP barred new enrollees, but it remained a huge drain on the fund.
DROP was created because Dallas police and firefighters were paid far lower wages than their counterparts in other nearby cities. Since they were eligible for retirement after 20 years on the job, many retired in their 40s, collected a pension, and started a new career elsewhere. DROP incentivized them to stay. Here’s an excerpt from a 2015 News story:
“Dallas cops and Dallas firefighters always stuck it out because you had DROP waiting on you,” said Rector McCollum, a retired police officer and former pension board member. “Those other cities didn’t have that. Now that you’ve taken that away, what’s the incentive to stay?”
The fund, as it stands, is likely unsustainable. Pension officials are staring down a $325 million loss from DROP.
DROP, as a whole, represents 42 percent of the pension system.
Is there lessons in this for Colorado PERA? Think through the incentives you offer. Be clear-eyed about the risks they pose. And don’t mortgage the future of your younger members by offering get-rich-quick schemes to your retiring members, even if they comprise the base of your political support.